U.S. mortgage applications reach six-year high

Applications for U.S. home mortgages surged by the most in more than six years last week as 30-year mortgage rates dropped below 4 percent for the first time since May 2013 on the back of falling U.S. government bond yields, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, jumped 49.1 percent in the week ended Jan. 9, its largest weekly percentage gain since late November 2008, in the middle of the U.S. financial crisis.

Refinancing activity was especially heavy. The MBA’s seasonally adjusted index of refinancing applications jumped 66.4 percent, the largest percentage gain in volume also since late November 2008, to its highest level since July 2013.

The gauge of loan requests for home purchases, a leading indicator of home sales, gained 23.6 percent to its highest level since September 2013.

Fixed 30-year mortgage rates averaged 3.89 percent in the week, down 12 basis points from 4.01 percent the week before. They hit their lowest level since May 2013.

“The US economy and job market continued to show signs of strength, but weakness abroad and tumbling oil prices have led to further declines in longer-term interest rates,” said Mike Fratantoni, MBA’s chief economist.

The yield on the U.S. 10-year note, the benchmark from which most mortgages are priced, on Tuesday marked its lowest end of day level at 1.905 percent since May 2013.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

Watch more about the increase in mortgage applications from Fortune’s video team:

Why Fannie Mae and Freddie Mac should stop refinancing mortgages

As mortgage giants Fannie Mae and Freddie Mac near a deal that could lower barriers and restrictions on borrowers with weak credit, it’s hard not to wonder if Americans have learned anything from the 2008 financial crisis.When the nation’s housing market crashed, these companies owed the U.S. government $187 billion.Clearly, it had become far too easy for borrowers with bad credit to get approvals for mortgages and for families to borrow more than they could afford. Virtually everyone agreed that officials needed to fix this problem so that it never happened again. In a column for the National Post on July 12, 2008, David Frum, a former speechwriter for George W. Bush, cleverly summed up the sentiment at the time when he wrote:

“The shapers of the U. S. mortgage finance system hoped to achieve the security of government ownership, the integrity of local banking and the ingenuity of Wall Street. Instead, they got the ingenuity of government, the security of local banking and the integrity of Wall Street.”

Given such sentiment, few would have imagined that during the next six years Fannie Mae and Freddie Mac would continue to provide the vast preponderance of the new single family mortgages being issued in this country. Rather than wind down their role, while operating under conservatorship, their market share has increased and there have been few real changes to the housing finance system. In fact, the concept of “qualified mortgages” in the Dodd Frank bill, which was supposed to ensure that banks retain some of the risks for the mortgages they wrote, has now been watered down to the point where the only mortgages for which banks need to retain a risk position on their balance sheet are those where borrowers are paying more than 43% of their income. And once again, Fannie Mae and Freddie Mac are guaranteeing mortgages with as little as a 3.5% down payment.

We would like to propose, as have some others, that the Federal Housing Finance Agency, which oversees Freddie and Fannie, take a significant step and begin to get these companies out of the business of refinancing home mortgages. By doing so, the agency will reduce, over time, the $5.3 trillion they currently guarantee, focus on the home ownership and job creation sides of their activities and offer the private sector an attractive new market. According to the Department of Housing and Urban Development, over 50% of the single family mortgages these agencies purchased the last 15 years were to refinance existing mortgages.

What is the appropriate role for Fannie Mae and Freddie Mac? Some people say the mortgage market would behave better privatized than propped up by Fannie Mae and Freddie Mac. Others cite the fact that since these agencies control such a large share of the present mortgage market, it would be disastrous to phase them out.

A number of people have put forth thoughtful proposals for reforming the housing finance system, including the Bipartisan Housing Commission and its Mortgage Finance Reform Working Group. These proposals try to deal with fundamental flaws in our system such as the fact that the private sector continues to push virtually all of the risk onto U.S. taxpayers. However, because we are not in crisis and because Fannie Mae and Freddie Mac have repaid their loans and are operating profitably, serious efforts at reform are not gaining much traction.

Without taking sides in this debate, continuing to allow these agencies to make new loans to facilitate purchase of a person’s prime residence seems an idea that should be acceptable to both sides. As long as these agencies continue to exist, a good case can be made that helping people purchase homes serves a useful public purpose and helps create jobs. In this role, these agencies can also ensure that there is adequate capital and liquidity in the mortgage market.

In contrast, there is little public purpose in refinancing most home mortgages. Why should Fannie Mae, Freddie Mac and the U. S. taxpayer subsidize homeowners who want to lower the mortgage rate on their home from 5% to 4%? And why should they subsidize homeowners who want to pull money out of their house by taking on a bigger mortgage? It is noteworthy that, in a single quarter in 2006, borrowers pulled out $84 billion dollars of net equity in cash-out refinancings, some portion of which became part of the $187 billion bailout. By guaranteeing the mortgages in a refinancing, Fannie Mae and Freddie Mac are both subsidizing the homeowners and taking on greater risk.

Even with this relatively simple proposal, there are a number of issues that will require further discussion. For example, should Fannie Mae and Freddie Mac continue to finance second homes or refinance mortgages to enable borrowers to make significant home improvements? Should they guarantee loans that might help a homeowner avoid foreclosure?

While refinancing may have limited public purpose, it seems like an ideal product for the private market. Banks can still process these loans and then securitize them to institutional investors. We believe institutional investors would love a security backed by mortgages made to homeowners with stellar track records of on time payments, especially if this pool of mortgages offered a slightly higher rate than a Fannie Mae or Freddie Mac pool. If the rate or terms were too onerous, the homeowner could stay with the existing mortgage.

Will this proposal to phase Fannie Mae and Freddie Mac out of the business of refinancing home mortgages fully protect U.S. taxpayers? No. But it might significantly reduce the potential losses. By narrowing the scope of Fannie and Freddie’s activities, it will ensure that we are no longer responsible for borrowers who overleveraged through cash out refinancing. Ideally, as the private sector gets more involved in the mortgage refinancing market, it will set the stage for greater involvement in other areas of the housing finance market.

Few people believe that the current mortgage finance system is sustainable over the long run. And fewer still believe that the government has taken the steps necessary to protect the U.S. taxpayer from another bailout. While the next disaster may not be the same as the last one, we believe that action needs to be taken. As Mark Twain warns us, “History doesn’t repeat itself, but it does rhyme.”

John Vogel is an adjunct professor at the Tuck School of Business at Dartmouth College, where he teaches courses in real estate and entrepreneurship in the social sector. Bill Poorvu is an adjunct professor in entrepreneurship emeritus at Harvard Business School.

Time to give the housing market a shot of adrenaline

My kids once dragged me onto a gut-wrenching amusement-park ride called Pharaoh’s Fury. It consisted of a large, Egyptian-style boat that swung on a 40-foot-long pendulum. It took about two terrifying minutes of swinging before the pendulum finally came to a rest. I stumbled out, swearing to cut off my kids’ cellphone service in retribution.

Over the past decade, the mortgage market has been on its own terrifying pendulum ride. Prior to the financial crisis, mortgages were available to just about anyone who could fog a mirror. (And some dead people too…) After the crisis, mortgages became primarily available only to those with gold-plated credit. That is a major reason housing has remained a laggard while other sectors like agriculture, energy, and autos have experienced decent growth in recent years. And prospects for improvement are dim: Home prices were down in the second quarter, and lending standards tightened even more last month.

To be sure, stringent loan requirements are not the only impediment to a housing rebound. Numerous studies show that millennials are much more inclined to delay home purchases than earlier generations. Gen Yers may prefer the greater mobility of renting (or living free for a while with Mom and Dad). Many also suffer from high student-debt loads, weak credit histories, a tough job market, and moribund wage growth.

CREDIT CRUNCH Before the financial crisis, just about anyone with a oulse qualified for a mortgage. Since then, bankers have tightened credit, slowing the housing market.Graphic Source: Mortgage Bankers Association

The complex problems plaguing our housing market don’t lend themselves to easy solutions. However, there is one piece of low-hanging fruit. It deals with an arcane issue that bankers call “put-back” risk. When lenders make loans that the government guarantees—primarily through Fannie Mae, Freddie Mac, or the Federal Housing Administration—they must promise to adhere to certain underwriting standards. If the loans later default, the government can put back the loan by asking the lender to either buy it back or absorb the resulting losses.

The problem is that when the housing market tanked, government mortgage insurers were confronting major losses. The worst subprime lenders had gone out of business, so the insurers started aggressively putting back loans on the healthier lenders who remained. But these put-backs were not limited to instances of poor underwriting. They were also based on some seemingly contrived reasons, such as technical issues with paperwork or a borrower’s changed circumstances after the mortgage was issued. Some of the put-backs targeted mortgages of homeowners who had made timely payments for as long as 10 years. Predictably, mortgage lenders large and small reacted by cutting back on their lending, offering credit only to those who presented little, if any, chance of default. By aggressively pursuing put-backs, the government was understandably trying to protect taxpayers. But the long-term result was to chill credit availability and impede the housing recovery.

We need fundamental reform of housing finance. Fannie, Freddie, and the FHA guarantee over 80% of all mortgage originations in the U.S. Private lenders have few alternatives other than to deal with this government tri-opoly. But as long as government dominates, it should work to bring the credit standard pendulum back to equilibrium. Sensible people like Wells Fargo’s John Stumpf have suggested a simple fix. The government should assume that a fixed-rate loan has been properly underwritten if the borrower has made timely payments for three years. But while this approach has been publicly embraced by Fannie and Freddie, it has yet to be meaningfully implemented, and the FHA has not followed suit.

Common-sense rules like this are needed to revive housing. Until then, the market will resemble an Edgar Allen Poe horror story: a pendulum endlessly swinging while the housing recovery remains in the pits.

Fortune contributor Sheila Bair is former chair of the FDIC, and is an independent director of a European bank that has U.S. mortgage operations.

HSBC settles mortgage case for $550 million

HSBC Holdings will pay $550 million to resolve a U.S. regulator’s claims that the British bank made false representations in selling mortgage bonds to Fannie Mae and Freddie Mac before the financial crisis.

The settlement announced Friday between the bank’s U.S. unit and the Federal Housing Finance Agency, the conservator for the two government-controlled mortgage finance companies, came less than three weeks before a Sept. 29 trial in New York, where HSBC has said it could have faced up to $1.6 billion in damages.

The deal is the latest arising from 18 lawsuits that the FHFA filed in 2011 to recoup losses on $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mac, which the U.S. government took into conservatorship amid the 2008 economic crisis.

The lawsuit accused HSBC of falsely representing to Fannie Mae and Freddie Mac that loans underlying $6.2 billion of mortgage-backed securities sold from 2005 to 2007 met underwriting guidelines and standards.

HSBC has denied the allegations, and did not admit wrongdoing as part of the settlement. The bank stopped issuing residential mortgage-backed securities in 2007.

“We are pleased to have resolved this matter,” Stuart Alderoty, general counsel for HSBC North America, said in a statement.

Under the settlement, HSBC will pay $374 million to Freddie Mac and $176 million to Fannie Mae, the FHFA said.

Along with settlements with other banks including Bank of America Corp, Deutsche Bank AG and Morgan Stanley, the FHFA has so far recovered nearly $17.9 billion. Last month, Goldman Sachs Group Inc agreed to a settlement that the FHFA valued at $1.2 billion.

Lawsuits remain pending against Nomura Holdings Inc and Royal Bank of Scotland Group Plc. The FHFA said it “remains committed to satisfactory resolution of these actions.”

Many of the banks settled after U.S. District Judge Denise Cote, who has overseen most of the FHFA litigation, issued several rulings making it harder to mount defenses.

The deal with HSBC came after it last month lost a bid to dismiss the case as untimely, in light of a recent U.S. Supreme Court ruling.

Goldman Sachs in $3.15 billion settlement with federal regulators

Goldman Sachs GS has agreed to pay $3.15 billion to repurchase mortgage-backed securities from Fannie Mae and Freddie Mac to settle accusations that it misstated the quality of the investments.

The settlement with the Federal Housing Finance Agency on Friday is just the latest in the string involving big banks behavior in the run up to the financial crisis.

Goldman Sachs’ repurchase puts a $1.2 billion premium on the value of the mortgage-backed securities. The amount is in line with previous estimates of between $800 million to $1.25 billion, according to Bloomberg.

Goldman will buy back securities sold to Fannie Mae and Freddie Mac to cover the period between 2005 to 2007, according to a release. The associated costs will be covered by the bank’s “reserves” from the second quarter of 2014.

“We are pleased to have resolved these matters,” Gregory K. Palm, general counsel of Goldman Sachs, said in a statement.

In 2011, the Federal Housing Finance Agency sued 18 banks, with JPMorgan Chase JPM and Deutsche Bank DB paying about $8 billion total last year to settle claims, according to Bloomberg. By reaching an agreement, Goldman Sachs becomes the 15th bank to settle its claims, the report said.

SunTrust Banks has agreed to pay $968 million to settle a federal probe into its mortgage practices from before and after the housing crash, the U.S. Department of Justice said Tuesday.

SunTrust, which has nearly 1,500 bank branches across the southeastern U.S., had been fighting allegations of improper mortgage originations as well as servicing and foreclosure abuses. The settlement puts an end to investigations by several federal agencies, including the DOJ, as well as the Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB).

As part of the settlement, SunTrust STI admitted that it violated the law between January 2006 and March 2012 by originating and underwriting Federal Housing Agency-insured mortgages that did not meet the agency’s requirements. The bank also failed to identify many loans that failed to meet standards and then neglected to report to HUD when it did find problematic loans. A large portion of SunTrust’s payment, $500 million, will go toward providing direct relief to borrowers and homeowners through reducing the principal for borrowers who are at risk of default and reducing interest rates for those who are current but underwater on their mortgages.

“SunTrust’s conduct is a prime example of the widespread underwriting failures that helped bring about the financial crisis,” U.S. Attorney General Eric Holder said in a statement. “From mortgage origination to servicing to securitization, the Department of Justice is attacking every facet of conduct that led to the Great Recession.”

The Justice Department said the terms of the agreement with SunTrust are in line with the $25 billion National Mortgage Settlement, a 2012 deal struck between the federal government and five of the nation’s largest mortgage providers to resolve similar claims of servicing abuses where banks used a practice known as “robo-signing” to force home foreclosures.

SunTrust announced the framework of its settlement in October, saying at the time that the money set aside for the payments resulted in a $323 million charge against the company in the third quarter of 2013.

In a statement on Tuesday, SunTrust CEO William Rogers, Jr. said the bank is pleased to have resolved the federal probes. “Like most major financial institutions, we are addressing issues related to mortgage matters stemming from the financial crisis and recession period,” he said.